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2007 11 14

Proof The Condo Bubble Has Arrived

What is wrong with this picture? it might be that our civic government is letting people occupy the street for no reason other than to garner more publicity for the condo being built at the corner of Yonge and Bloor, when they just as easily could have given them all numbers and let them go home. Or it might be that we have seen it so many times before, at or just after the peak of some boom like when gold hit $ 700 twenty years ago and people lined up on Bay Street to buy it, only to see it drop to 300 and stay there for years. Or the last condo crash in the early nineties.

This week's Fortune magazine analyzes the American housing crash and chalks it up to a very simple cause: prices got out of whack with rents. Like any other commodity, people expect a return on investment; in housing, low interest rates and no money down loans let housing prices rise so fast that there is no way that current market rentals come close to covering costs. But it is no longer about investment, it is now about speculation; it is now a bubble.

All kinds of crazy things happen in bubbles; people start waxing eloquent about location being perfect when it is across the street from the two ugliest office buildings in the city and you cannot stand on the corner in winter without being blown away. Looking at the wall of the Hudson Bay store- that's location?

People stop looking at track records and Tarion complaints and happily purchase from Kazakhstani developers that nobody has ever heard of, building to a height that nobody has ever done in Toronto for a residential building.

People start talking about all the international money flowing into Toronto as such a wonderful place to own real estate when we can't pave our streets or keep our buses running or our tourist attractions going because nobody comes here anymore, the dollar is so high. So where are all these international buyers coming from?

People forget that developers don't borrow money to build, they build to borrow money, they are gamblers who will keep doubling their bets as long as suckers come to the table and the banks keep financing them. The second the banks decide "gee, we are over-exposed in real estate" (which they will, any day, all at the same time) the industry will shut down, just like it did in 92.

Then we can go back to real estate being about places to live, not invest.